Bullish on banking, MFs plan bank exchange traded funds

Rising demand from investors, easy fund management, a bullish view on the banking sector and booming economy have led Indian mutual funds to take a fancy to banking exchange traded funds.

Two fund houses have already sought regulatory approval for such schemes in just a week.

Kotak Mahindra Mutual Fund sought the Securities and Exchange Board of India's approval for banking exchange traded funds on June 5.

On reasons for a bank exchange traded funds, Sandesh Kirkire, chief executive officer of Kotak Mahindra Mutual Fund, said, "basically, demand...I think there is a clear appetite for banking index products from HNIs (high net worth individuals), corporates, and foreign institutional investors."

Kirkire agrees that retail participation would be low in such schemes.

So far in India, only Benchmark Mutual had a banking exchange traded funds called Bank BeES.

On the back of huge inflows and a slew of banking sector news, the assets under management of Bank BeES surged nearly 47 per cent to Rs 5,845 crore in May.

"It is partly due to market appreciation and partly due to inflows.

Inflows have come from all categories of investors including retail," said Rajan Mehta, executive director.

The CNX Bank Index rose just 12.52 per cent, clearly indicating huge interest in Bank BeES that emerged as the country's largest equity scheme.

Bank BeES topped the index funds category in May with 12.56 per cent returns.

India's largest asset manager Reliance Mutual Fund too filed draft offer document for a bank ETF on Tuesday.

"We would basically like to be present in every segment. We are bullish on the entire country. We are bullish on the banking sector for the next five-seven years due to growth prospects," a Reliance Mutual Fund official said.

On banking sector prospects, Kirkire said, "we are positive on the sector as the economy is doing well. Over the next one-to-three years, the earnings growth of the sector would be in line with the nominal GDP (gross domestic product) growth, which is 13-14 per cent."

Kirkire does not foresee a significant rise in interest rates.

"Our interest rates are much higher than other countries and that is leading to capital flows. Going forward, I do not expect a significant rise in interest rates."

He expects credit growth to slow down, but does not anticipate pressure on net interest margins.

Jayesh Shroff, fund manager of SBI Mutual Fund, too is upbeat on the sector.

"Public sector banks would continue to grow at a lower pace compared with private banks. But, if the economy has to grow, this is one sector that would fuel economy."

When asked why not a vanilla banking fund, Kirkire of Kotak Mutual said, "ETFs normally have low tracking error and are easy to manage. Globally, also such schemes are popular."

Adopting a passive investment approach, banking ETFs invest at least 90 per cent of the corpus in banks featuring in the CNX Bank Index.

Shroff of SBI Mutual Fund said "it is easy to get in and out of bank ETFs. The expense ratio is low. So, normally ETF is considered the best mode."

Interestingly, it must be mentioned here that Reliance Mutual manages one vanilla fund dedicated to the banking sector.

On the rationale for a bank exchange traded funds, the Reliance Mutual Fund official said, "ETFs have a passive investment approach. We do not take view on stocks. For passive investors, (bank) ETF would make sense. Others can invest in the banking sector fund where we take stock-specific views."

Apart from Reliance Mutual, UTI Mutual also has a banking sector fund.

For the year to Tuesday, Reliance Banking Fund and UTI Banking Fund recorded 66.67 per cent and 72.37 per cent returns, respectively. On the other hand, Bank BeES registered 69.14 per cent return during the period.